What’s the background of Business Tax/ VAT reform and What’s the extension the reform has been developed
FAQ 1, What’s the background of Business Tax/ VAT reform and What’s the extension the reform has been developed
China has been levying different taxes on the tertiary industry (service sector) and the secondary industry for many years. Most of taxpayers in the tertiary industry are subject to Business Tax (“BT”) and most of the taxpayers in secondary industry shall pay Value Added Tax (“VAT”). Although BT is classified as a kind of turnover tax, the BT paid by taxpayers cannot be treated as a credit by the customer, when the customer buys a service for further process of its products or services. And the current VAT system covers very narrow extent of taxable items, which cannot create an efficient tax deduction mechanism among the entire economy and the neutral nature of VAT is weakened accordingly. Different industries have different turnover tax treatment. To improve the economy structure, promote the service sector and fix the tax collection problems, China implemented a testing BT/VAT reform in early 2012 in Shanghai. The testing reform was implemented only in the transportation industry and modern service industry. In late 2013, the reform has been implemented in more than 10 cities/provinces including Beijing, Shanghai, Shenzhen, Tianjin, Jiangsu province, Anhui province, Hubei province, Guangdong province, Ningbo city and Xiamen City. It is reported by various newspapers that during the State Council Standing Committee Meeting of 10 April 2013, the State Council made a decision that the BT/VAT reform currently taking place in 9 pilot areas will be extended to cover all China starting in late 2013. Further, it is intended that railway transportation, postal services and telecommunication services will also be subject to the BT /VAT reform.
FAQ 2, What is the calculation basis of corporate income tax by non-tax-resident enterprises, where VAT is also payable
Under the BT/VAT reform, a non-tax-resident may be subject to VAT according to the new rule. In accordance with the corporate income tax law and the applicable double tax treaty, a non-tax-resident may also be subject to corporate income tax (which is known as “withholding tax”). The State Administration of Taxation issued a clarification on February 29, 2013 that in case both VAT and corporate income tax ("CIT") are payable by a non-tax-resident enterprise for taxable income sourced from China which is not connected to a permanent establishment (“PE”) in China, when calculating PRC CIT, the VAT paid shall be excluded from the CIT calculation basis.
FAQ 3, How to file the VAT and consumption tax for exportation of goods and services and how to get related tax refund
The tax filing and tax rebate application for exportation are considered most complicated tax filing practice in China due to that this practice involves not only tax authority but also the State Administration of Foreign Exchange, the customs and the bank. The tax payer shall timely declare VAT input authentication for tax deduction and rebate purpose and file its domestic sales and exportations in order to correctly calculate the VAT to be paid or refunded. Previously, China run a mechanism known as “Exportation, Foreign exchange collection and verification”. In order to get the VAT refund, the taxpayers had to match the foreign exchange collections with each exportations within a prescribed period. Before getting the VAT refund, a complicated declaration procedures shall be strictly followed. In order to improve the declaration procedure, improve the efficiency of foreign exchange control and international trading of China, the authority announced to cancel the mechanism “Exportation, Foreign Exchange collection and verification”. In 2012, the SAT issued the Administrative Measures on VAT and Consumption Tax related to Exportation of Goods and Service (“ Measures ”),. The Measures provides quite comprehensive rules for tax declaration for exportation and are viewed as a brand new framework regulation for VAT and consumption tax treatments for exportation of goods and services. In March 2013, based on the Measures, the SAT issued an announcement to provide further detailed guidance on various procedure and filing issues, e.g. application for VAT refund qualification, application for a change in the VAT refund calculation method, document requirements for tax declarations involving exportations, etc.
It is advisable that tax accountants study the above mentioned Measures and Announcement carefully to comply with the relevant procedure and document requirements. The following links provide more detail on this topic http://www.chinatax.gov.cn/n8136506/n8136593/n8137537/n8138502/12254350.html ; http://hd.chinatax.gov.cn/guoshui/action/GetArticleView1.do?id=204638&flag=1